What Is a Bottleneck?

A bottleneck is a point of congestion in a production system (such as an assembly line or a computer network) that stops or severely slows the system. The inefficiencies brought about by the bottleneck often create delays and higher production costs.

The term “bottleneck” refers to the typical shape of a bottle and the fact that the bottle’s neck is the narrowest point, which is the most likely place for congestion to occur, slowing down the flow of liquid from the bottle.

There are two main types of bottlenecks: short-term and long-term. A short-term bottleneck is temporary and typically caused by temporary conditions such as employees on vacation or on sick leave. Long-term bottlenecks are baked into the production process and include such things as inefficient machinery.

Bottlenecking, the process that creates bottlenecks, can have a significant impact on the flow of manufacturing and can sharply increase the time and expense of production. Companies are more at risk for bottlenecks when they start the production process for a new product. This is because there may be flaws in the process that the company must identify and correct; this situation requires more scrutiny and fine-tuning. Operations management is concerned with controlling the production process, identifying potential bottlenecks before they occur, and finding efficient solutions.

Understanding a Bottleneck

As an example, assume that a furniture manufacturer moves wood, metal, and other raw materials into production, then incurs labor and machine costs to produce and assemble furniture. When production is complete, the finished goods are stored in inventory. The inventory cost is often transferred to the cost of goods sold (COGS) when the furniture is sold to a customer.

If there is a bottleneck at the beginning of production, the furniture maker cannot move enough raw materials into the process, which means that machines sit idle and paid workers don’t work productively, creating a situation of underutilization of resources. This increases the cost of production, presents a potentially large opportunity cost, and may mean that completed goods do not ship to customers on time.

Bottlenecks and Production Capacity

A bottleneck affects the level of production capacity that a firm can achieve each month. Theoretical capacity assumes that a company can produce at maximum capacity at all times. This concept assumes no machine breakdowns, bathroom breaks, or employee vacations.

Because theoretical capacity is not realistic, most businesses use practical capacity to manage production. This level of capacity assumes downtime for machine repairs and employee time off. Practical capacity provides a range for which different processes can operate efficiently without breaking down. Go above the optimum range, and the risk increases for a bottleneck due to a breakdown of one or more processes.

If a company finds that its production capacity is inadequate to meet its production goals, it has several options. Company management could decide to lower their production goals to bring them in line with their production capacity. Or, they could work to find solutions that simultaneously prevent bottlenecks and increase production. Companies often use capacity requirements planning (CRP) tools and methods to determine and meet production goals.

Bottlenecks and Production Variances

A variance in the production process is the difference between budgeted and actual results. Managers analyze variances to make changes, including changes to remove bottlenecks. If actual labor costs are much higher than budgeted amounts, the manager may determine that a bottleneck is delaying production and wasting labor hours. If management can remove the bottleneck, labor costs can be reduced.

A bottleneck can also cause a material variance if materials are exposed to spoilage or possible damage as they sit on the factory floor waiting to be used in production. Bottlenecks may be resolved by increasing capacity utilization, finding new suppliers, automating labor processes, and creating better forecasts for consumer demand.

Real-World Example of a Bottleneck

Bottlenecks may also arise when demand spikes unexpectedly and exceeds the production capacity of a firm’s factories or suppliers. For instance, when Tesla Inc. (TSLA) first began production of its all-electric vehicles, demand was high for the vehicles, and some analysts were concerned that production would be slowed due to problems in the production line. In fact, Tesla has experienced ongoing production bottlenecks due to the need to manufacture the custom battery packs that supply their vehicles with power.

Tesla founder Elon Musk has said the company’s ability to expand its product lineup depends squarely on its ability to produce a large number of batteries. To make that happen, in a joint venture with Panasonic, Tesla opened a massive near Reno, Nev., in 2016, which makes the company’s lithium ion batteries and electric vehicle subassemblies. By mid-2018, the company claimed that its factory was already the highest-volume battery plant in the world in terms of gigawatt-hours (GWh). To make a dent in the waiting list for back-ordered vehicles, Tesla says it will need to continue to invest in and build more Gigafactories worldwide.

The Bottom Line

A bottleneck is a point of congestion in a production system that slows or stops progress. Short-term bottlenecks are temporary and often caused by a labor shortage. Long-term bottlenecks are more incorporated into the system itself and characterized by inefficient machinery or processes. Since bottlenecking is counterproductive and leads to a reduction in production efficiency, eliminating bottlenecks is key to increasing profitability. The best way to eliminate bottlenecks is to increase system capacity by restructuring the process or investing in people and machinery.